Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, January 8, 2013

U.S. Supreme Court Hears Oral Argument in Gabelli v. SEC

The U.S. Supreme Court heard oral argument today in Gabelli v. Securities and Exchange Commission (No. 11-1274).  The issue in this case is when the federal statute of limitations begins to run when the government seeks civil penalties for claims based on fraud.  

In April 2008 the SEC filed a complaint alleging that defendants concealed that they allowed market timing in a mutual fund contrary to the fund’s stated policy. The market timing took place from 1999 until 2002. The SEC did not discover the alleged fraud until late 2003. The applicable statute of limitations is 28 U.S.C. 2462, which states that the action must be commenced within five years “from the date when the claim first accrued.”  The Second Circuit held that because the SEC’s complaint alleged that defendants aided and abetted the investment adviser’s fraud, the fraud discovery rule defined when the claim accrued and the SEC need not plead that the defendants took affirmative steps to conceal their fraud. 

The Supreme Court must decide whether the government has additional time to bring an action when the complaint alleges fraud or a concealed wrong. Under the judicially created discovery rule for fraud actions, the limitations period does not begin to run until the plaintiff discovers, or in the exercise of reasonable diligence, should have discovered, the fraud. The SEC argued that the discovery rule is incorporated into § 2462 and the claim did not “accrue” until it first discovered the fraud in late 2003. The defendants, in contrast, argued that the discovery rule is not part of the statute and that the SEC’s suit is time-barred, because it was not brought within five years of when it had the right to file the suit.   

In oral argument, Lewis Liman,  arguing on behalf of the defendants, emphasized that Congress provided a clear and easily administered limitations period whenever the government sought a civil penalty (and was not acting on behalf of injured investors and was not seeking damages or equitable relief).  Several Justices questioned whether the statute was so clear, since the SEC's action could also be characterized as a fraud action and the term "accrued" is not defined in the statute.  They also questioned why, if the fraud discovery rule was available to private plaintiffs, it was not also available to the government.

Jeffrey Wall, arguing on behalf of the government, emphasized that the courts have long recognized the fraud discovery rule and that it should be read into the statute.  The Justices, however, pressed Mr. Wall to identify a single case in which the discovery rule was applied in a criminal case with respect to a penalty or a criminal sanction.  In particular, Justice Breyer asserted that "until 2004 I haven't found a single case in which the government ever tried to assert the discovery rule where what they were asserting was a civil penalty ... with one exception ... in the 19th century" [when the government lost and conceded the argument].  Justice Breyer also made clear that he was concerned about the consequences if the government could bring an action for "quasi-criminal" penalties and essentially abolish the statute of limitations by asserting fraud, in areas of law such as Social Security or Medicare.  Several Justices also pressed Mr. Wall about the difficulties a defendant would have in attempting to show that the government could have discovered the fraud earlier with due diligence.  Mr. Wall, in turn, stated that "I cannot imagine that the Congress, which allowed agencies to seek civil penalties ... would have thought that the only people who could get away without paying them are the ones who commit fraud or concealment and that remains hidden for five years."  Justice Ginsburg also questioned why the SEC had delayed in bringing this suit, and Justice Kagan suggested that this was a decision about "enforcement priorities."

It is very difficult to "read" Justices' reactions based on a transcription of an oral argument.  It seems clear, however, that the government encountered considerable skepticism because the government is asserting a power that it had not previously asserted for 200 years.  The question posed by Justice Kagan was "why hasn't the government asserted this power previously?"

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